The median seed startup today is worth $12 million, reaching $802 million by the time it goes public. Three years after IPO, however, almost two thirds of these companies are underperforming the market, with a sizable majority (64%) more than 10% behind the market’s returns.
In short, while private markets continue to reward companies with higher and higher valuations, the stock market punishes them after they go public.
There are a few potential explanations for this discrepancy. For one, by the time a firm goes public, it may be hard to continue to grow at the same breakneck pace as in its early days. The law of large numbers becomes a more significant constraint, and it may be difficult to move into new markets or product categories.
Additionally, the competitive landscape changes when a company goes public – larger firms with more resources can copy the business model and enter the market, putting pressure on margins.
Moreover, a short-term focus on quarterly results may lead to suboptimal decision-making by management. In order to meet Wall Street’s expectations, firms may make decisions that sacrifice long-term value creation, such as investing in marketing campaigns that boost short-term sales but don’t have a lasting impact.
The pressure to generate returns for shareholders may also lead management to take on the wrong risks, which can backfire. For example, a company may choose to enter into a new market that is outside of its core competency, in hopes of generating higher growth. But if the foray fails, it can drag down the firm’s stock price and negatively impact long-term shareholder value.
It’s also worth noting that going public is an onerous process that can occupy management’s attention and resources for months, if not years. This may further lead to a distraction from running the business, which can have negative consequences on performance. As a result, companies are staying private for longer, which is why we’re seeing more unicorns (private companies with valuations over $1 billion) than ever before.
Another advantage of investing in these privately-held firms is known as the “liquidity premium.” This is the extra return that investors demand for investing in illiquid assets, such as private companies, as opposed to liquid assets like publicly traded stocks. The reason for this is that it can be difficult and time-consuming to sell private company shares, and there is often less information available about these firms. As a result, investors demand a higher return to compensate them for the added risk.
Of course, the average startup never makes it to IPO, and most don’t command such high valuations in the private markets.
Even comparing typical returns, private companies outperform public firms. According to Cambridge Associates, the S&P 500 has only returned an average 11% IRR, while the average VC fund generates a 19% IRR.
Private market investing has another advantage in that returns are relatively uncorrelated with the stock market. This is important because it means that investors can potentially generate higher returns without taking on additional risk. For example, a venture-backed startup may succeed even if the overall stock market is struggling, which provides diversification benefits for an investor’s portfolio.
Private markets have been outperforming the public markets for years, and with “dismal returns” ahead for stock market investors, now is the time to consider alternative investments.
Gridline is a digital wealth platform that provides access to some of the best-performing private market funds, so you can make the most of these opportunities. With lower capital minimums, lower fees, and greater liquidity, Gridline is the most efficient way to gain exposure to these assets.
Private markets have long outperformed public markets. Several arguments have been put forth to explain this outperformance.
One common explanation is that private companies are less efficiently priced due to information asymmetries between insiders and the market at large. Additionally, a liquidity premium exists in private markets, as investors are unable or unwilling to exit their positions as quickly as in public markets.
Even the short-termism of public markets plays a role in the outperformance of private companies. Public companies are pressured to deliver quarterly results, while private companies can take a longer-term view. This gives private companies a significant advantage when making strategic investments, such as research and development or long-term marketing campaigns.
But a more nuanced explanation may be that active private market managers have more opportunities to generate alpha.
Active management refers to actions taken by a manager that deviate from a passive strategy, such as security selection, market timing, or dynamic asset allocation. Active private market managers may also add value through their relationships and networks.
Preferential access to investments, greater control over portfolio composition, and the ability to take a longer-term view are all factors that may allow active private market managers to generate alpha. Good fund managers diligently pick winning companies and nurture those investments to ensure they’re successful.
The “fundamental law of active management,” which says an investor’s excess return equals skill times opportunity, separates the winners from the losers.
Manager selection is comparatively more complicated in private markets due to the lack of transparency and availability of information. At the same time, it’s also far more critical in private markets due to the wider dispersion of returns. While top-quartile private equity funds produce, on average, an incredible 30% net IRR, many bottom-quartile funds lose money. The median fund’s 19% net IRR still significantly outperforms public markets, but even better returns can be achieved.
Therefore, Gridline carefully selects managers based on several quantitative and qualitative criteria that may predict outperformance. These include, but are not limited to, past performance, a conviction in the investment thesis, preferential access to investments, and the ability to add value through portfolio construction and monitoring.
To select the best managers, Gridline relies on a combination of screening tools and due diligence conducted by our team of experts. Our screening tools help to identify managers that meet our criteria, while our due diligence process allows us to assess further a manager’s skills, capabilities, and investment process.
Rather than relying solely on the built-in liquidity premium of private markets or even the “complexity premium” associated with less efficiently priced securities, Gridline looks for managers that can generate alpha through active management. We believe this is the best way to achieve superior long-term returns for our investors.
Private markets have delivered superior returns for several reasons. Inefficiencies in pricing and liquidity premiums are among the most commonly cited explanations.
However, more significant opportunities for alpha generation may be the most critical factor. Active private market managers have several advantages, including preferential access to investments, greater control over portfolio composition, and the ability to take a longer-term view.
But manager selection is more difficult in private markets due to the lack of transparency and availability of information. Therefore, it’s essential to carefully select managers based on many criteria that may predict outperformance.
Hybrid funds, also known as asset allocation funds, invest in two or more asset classes to provide stability and growth. In this guide, we’ll explore the basics of hybrid funds, including how they work and how they can be used to achieve financial objectives.
There are several types of hybrid funds at varying risk levels.
Aggressive hybrid funds invest 65-80% in equity and equity-related securities and the remainder in debt and cash. Balanced hybrid funds invest 50% in equities and the rest in debt and cash. Conservative hybrid funds invest just 10-25% in equities.
Equity savings funds are less risky and aim to achieve lower volatility with partially hedged equity positions. Arbitrage funds exploit the price differences between two different markets. For example, an arbitrage fund may invest in a company’s equity and debt to take advantage of different interest rates.
Finally, multi-asset funds invest across asset classes, including public and private stocks, bonds, commodities, and real estate.
Hybrid funds offer investors the potential for both stability and growth. They can help diversify a portfolio and provide exposure to different asset classes.
Hybrid funds also have the potential to outperform traditional equity and fixed-income investments in certain market conditions. For example, when interest rates are falling, bond prices typically rise. This means that a hybrid fund with a significant allocation to bonds may outperform a pure equity fund.
Moreover, exposure to alternative investments in a multi-asset fund can help to hedge against market risks and provide diversification benefits. Private markets consistently outperform public markets over the long term and can offer absolute return potential in all market conditions. In downturns, private markets have faster recoveries and shallower drawdowns than public markets.
The reasons for this are manifold; private companies are generally smaller, more agile, and focused on organic growth. They also have less debt, providing a natural hedge against rising interest rates.
Furthermore, private companies tend to be owner-operated with a longer-term view, meaning they are less impacted by short-term market movements. Private companies can take a longer-term view of investments without quarterly reporting, meaning they are less likely to engage in short-termism.
Like all investments, hybrid funds have risks that need to be considered.
The most significant risk is that the fund may not achieve its investment objectives and underperform other asset classes. For example, a balanced fund that invests 50% in equities may underperform if the equity markets rise by 10% but the debt markets fall by 5%.
It’s also important to remember that although hybrid funds offer exposure to different asset classes, they still carry the risk of over-concentration in a single asset or sector. For example, a fund that invests in both stocks and bonds at a time when private equity is booming may be over-concentrated in public markets.
Retail investors commonly invest in hybrid funds through mutual fund companies or exchange-traded funds (ETFs), which are traded on stock exchanges.
Institutional investors, such as pension funds and insurance companies, have larger allocations to private markets and hybrid funds. They commonly access these funds through private placement arrangements with fund managers.
Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds. It enables individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.
Short runways, tight budgets, and an uncertain future. That’s the landscape for many portfolio companies during a recession, and Bloomberg analysts predict there’s a 100% chance one will hit in 2023.
However, as any private market investor knows, there is also an opportunity when there is a crisis. Active fund managers can position themselves to capitalize on companies that shift tactics during a downturn and to help their portfolio companies outperform the competition.
In the early stages of a recession, CEOs batten down the hatches. They often make layoffs, cut costs, and optimize their businesses for the new economic reality. Some companies will try to secure additional funding, while others will pivot to new business models. And unfortunately, some marginal players will shut down altogether. But as the recession drags on, a new class of startups will emerge, focusing on profitability rather than growth at all costs.
The unprecedented 14-year bull market has lulled many investors into a false sense that “stocks only go up.” Many private companies also engaged in excessive risk-taking, assuming they would always be able to raise money at ever-higher valuations.
CEOs are rolling up their sleeves to get their companies’ houses in order. They are developing new strategies for revenue and cost cutting, and they are rethinking their business models. Meta recently laid off 11,000 people, while Twitter eliminated over half its workforce. These firms are not alone, with 50% of employers expecting layoffs.
Some companies are trying to take advantage of the situation by acquiring other businesses at bargain prices. A KPMG survey of CEOs found that 89% plan to make acquisitions over the next three years. M&A is a key growth opportunity in recessions, as firms that can acquire companies in downturns have historically outperformed the market by 7%.
Further, 78% of CEOs are aggressively investing in digital strategies to secure first-mover or fast-follower status, according to the KPMG survey. This is a significant move, as businesses that embrace digital transformation outperform their peers.
Meanwhile, a new breed of startups emerges out of any downturn. As today’s downturn has yet to fully play out, it isn’t easy to know precisely what form these new companies will take. We can, however, look back at previous recessions to get a sense of what to expect.
In the early-2000s dot-com crash, many “pets.com” type companies with unproven business models collapsed. But a number of new startups, such as Amazon and eBay, rose to prominence. Similarly, in the 2008 financial crisis, we saw the rise of “sharing economy” companies like Airbnb and Uber.
This year, we’ve seen several retail bankruptcies as consumer spending and confidence show weakness. Retail technology startups are springing up to help brick-and-mortar businesses win against the e-commerce juggernaut. For instance, Swiftly Systems recently raised another $100 million to become a unicorn, helping physical stores grow their online presence.
Swiftly is no exception, as VCs still have record dry powder and are continuing to raise eye-popping significant funds to invest in the next generation of startups.
Investors with a long-term view don’t view today’s market conditions as a time to pull back. Instead, they see opportunities to build positions in great companies that will emerge from the downturn as more vital than ever.
With Gridline, you can access a curated selection of professionally managed alternative investment funds and gain diversified exposure to non-public assets with lower capital minimums, fees, and greater liquidity.
Liquidity, or the ability to quickly turn an asset into cash, is conventionally seen as a desirable trait. It’s what enables millions of traders worldwide to buy and sell stocks and bonds with the click of a button.
In comparison, private market assets like venture capital and private equity are often seen as riskier because it can take years to cash out. In reality, this illiquidity is a feature, not a bug, which allows investors to hold over market cycles and ultimately earn higher returns.
A popular investment saying goes, “time in the market, not timing the market,” which is what matters most for returns. The data bears this out. A study by Fidelity Investments found that investors who missed the ten best stock market days missed out on 55% gains.
If you’re trying to time the market, you will inevitably miss these big days. But if you’re invested for the long haul, you will participate in the market’s ups and downs, capturing the gains when stocks rise and weathering the losses when they fall.
This is where illiquidity comes in. Because it takes longer to cash out of an illiquid investment, you are effectively forced to stay invested for the long haul. This “time in the market” allows you to capture the market’s ups and downs, which is essential for higher returns.
Moreover, over the long term, stocks have never lost money. There’s never been a 20-year period where stocks have declined in value. That’s why Warren Buffett famously said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for 10 minutes.”
Simply put, illiquidity protects you from redemption risk. This is the risk that you will redeem your investment at a poor time, which is exactly what most investors do, causing them to underperform market indices consistently.
Beyond forcing you to stay invested, illiquidity also allows you to capture a risk premium in the form of higher returns.
The size of the premium varies depending on the asset, but one PIMCO analysis puts the private market illiquidity premium at around 1.8%. That’s not counting the complexity premium of private markets, nor is it counting the additional alpha that fund managers can create.
Still, this alone can significantly impact returns over the long term. For example, let’s say you have one investment of $1 million without an illiquidity premium that returns 5% annually. After ten years, you would have $1.6 million. If you had another equally sized investment that added a 1.8% illiquidity premium, you would have $1.9 million after ten years – a 19% increase.
The benefits of illiquidity are especially pronounced in retirement accounts, such as 401(k)s and IRAs, where the money is meant to be invested for the long term.
Liquidity is often seen as a desirable trait, but it can make you a worse investor. Illiquidity, on the other hand, can provide significant benefits, such as forcing you to stay invested and providing an illiquidity premium, not to mention the tax advantages of long-term investing.
For long-term investors, these benefits are hard to ignore. With Gridline, you can access top-quartile private market alternative investments, typically only available to sophisticated family offices and endowments. Gridline’s mission is to open up access to these investments transparent, efficiently, and lower-costly.
In a downturn, many investors look for the perfect moment to enter the markets. Even worse, around 42% of Americans don’t invest in the stock market, and even fewer have any experience with private markets.
With significant crashes on the mind of many investors, it’s understandable why some individuals are skittish about stocks. Since 1974, there have been 24 separate market corrections, so even barring a recession, stocks regularly lose 10% or more of their value.
Private markets, too, experience regular volatility. However, choosing to sit out the markets would be a dire mistake. Calpers, the largest pension fund in the United States, recently admitted that avoiding private equity during the financial crisis cost them up to $18 billion. Around 2 million members rely on Calpers for their retirement, so the implications of this missed opportunity are vast.
Moreover, sitting out of private markets means foregoing one of the essential tools for diversification. Historically, private markets have experienced less steep drawdowns, faster recoveries, and higher long-term returns than public markets.
The average private equity fund generates a 19% net IRR, more than triple the S&P 500’s projected annualized returns over the next decade. Venture funds aim to outperform broad-based market indices by 5-15 percentage points, and this outperformance continues in downturns.
In the decade following the dot-com crash, private equity returned a 7.5% average, while the PME index annual return dropped to 0.08%. Buyout funds, too, are considerably more resilient than public markets, as only 2.8% of buyout funds experienced catastrophic loss during recessions, compared to 40% of stocks.
This outperformance is particularly pronounced among first-time funds, nearly 18% of which nab an IRR of 25%, while later funds only exceed that number about 12% of the time.
The reasons for this outperformance are numerous, but one key reason is that private companies are less efficiently priced. Fewer analysts are following these companies and less public information is available, so there’s more room for mispricing. The so-called “complexity premium” results in private companies being cheaper than public companies with similar characteristics.
In addition, private firms aren’t subject to the short-termism rampant in public markets. Public companies are under constant pressure to meet quarterly earnings targets, which can lead to suboptimal decision-making. Private firms have a longer time horizon and can take a more patient approach to business.
Moreover, while downturns hit public companies hard, they present opportunities for private equity firms to “buy and build.” Private equity firms can buy up companies at a discount and then invest in them for the long term, which leads to outsize returns.
Investors who’ve written off private markets are missing out on a crucial tool for diversification and long-term growth. By avoiding private equity, Calpers lost billions of dollars in potential gains. For the average investor, the cost is no less real. In fact, according to Fidelity Investments, investors who missed the ten best stock market days missed out on 55% gains.
It’s time to get in the game. Investing in private markets can be lucrative with proper due diligence and a long-term time horizon. Gridline makes it easy to access top-quartile private market investments with low capital minimums and high liquidity. Get started today to secure your financial future.
Retail and institutional investors alike have long been enamored with stock picking. On the surface, the logic is simple: find public or private stocks undervalued by the market and reap the rewards when the market catches up to their actual value.
However, despite the allure of stock picking, the reality is that it is a challenging task to do well. One study found that individual investors consistently underperform market indices at an average of 1.5% per year. Further, a Berkeley study finds that “the vast majority of day traders are unprofitable.”
Warren Buffett put it nicely: “I don’t think most people are in a position to pick single stocks.”
One challenge with stock picking is that public and private stocks have different returns. That is, some stocks will outperform the market while others will underperform.
For public stocks, the return dispersion is relatively small. This means there is no significant difference between the best and worst-performing stocks. However, for private stocks, the return dispersion is much larger.
Another challenge with private stocks is accessibility. Many private stocks are not accessible to retail investors. They may be illiquid or require a minimum investment that is too high for even well-capitalized investors.
This lack of accessibility makes it difficult for stock pickers to find private stocks undervalued by the market.
Further, high-quality data is an industry of its own and is critical for stock picking. Unfortunately, there are many challenges associated with such alternative data.
One challenge is data quality. Private companies are not required to disclose their financial information the same way public companies do. This lack of transparency can make it difficult to assess the actual value of a private company.
Another challenge is data sparsity. For many industries and countries, there is a lack of comprehensive data sets on private companies. This lack of data can make it difficult to find undervalued stocks.
Even when data is available, it may not be timely. For example, a company may announce earnings after the stock market has closed for the day. When investors access this information, the stock price may have moved significantly.
In the 1970s, academic John Bogle popularized the concept of indexing. The idea is simple: instead of trying to pick stocks, investors should buy a basket of stocks that represents the market as a whole.
This approach diversifies away individual stock risk, reduces transaction costs, and gives investors access to the entire market, not just the stocks they can find and research.
Indexing is an effective investment strategy for both public and private markets. It’s difficult for managers to outperform the S&P500 consistently. And when it comes to private markets, while individual startups have a high probability of failure, a highly diversified portfolio, such as a VC fund of funds, can be relatively low risk.
In that way, diversified investing in private markets can both offer risk reduction and greater returns. For example, a study by Cambridge Associates found that top-quartile VC funds outperformed the S&P by ~2X over the last 5-, 10-, 15-, and 25-year periods. Even the median private equity fund’s return of 19% is far higher than that of public stocks.
Stock picking is a difficult task made even more difficult by the challenges associated with accessibility and data. However, indexing provides a simple and effective solution for investors who want to participate in the private markets without picking stocks.
With Gridline, you can index the private markets and gain exposure to a wide variety of assets with low capital minimums, transparent fees, and greater liquidity.
Mandated quarterly earnings reporting and activist investor pressure have created a short-term orientation in public markets that is detrimental to long-term value creation.
The world’s largest asset manager, BlackRock, recognizes this bias toward the short term. In a letter to CEOs in 2015, Laurence Fink warned that “the effects of the short-termist phenomenon are troubling … more and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”
These words have been borne out by research. For example, a survey of 401 financial executives found that 78% would sacrifice long-term value to smooth earnings. Other researchers point to corporate dividends and buybacks as evidence of the short-term orientation of public markets. Public companies have paid out a stunning 90% of their profits in dividends and share repurchases, leaving little available for investment in the long term.
While it’s difficult to quantify this bias’s economic impact, Singapore’s research provides some insights. In 2003, the country implemented a listing rule that required firms with a market capitalization above S$75 million to publish quarterly financial statements. A study found that this hurt small firms, with a 5% decrease in firm value.
Decades of legislation have created a burdensome disclosure regime for public companies. Once public, firms must disclose an ever-increasing amount of information to satisfy the demands of regulators, investors, and the general public.
This disclosure imposes costs in terms of time and money and can impede a firm’s ability to compete by revealing information that would be a better-kept secret. In addition, the quarterly earnings reporting process creates pressures that can lead management to make suboptimal decisions to meet short-term targets.
In contrast, private companies are not subject to these exact disclosure requirements. They can choose to disclose information voluntarily and are not under the same pressure to meet short-term targets set by analysts and investors. As a result, private companies can take a longer-term view, making decisions that are in the business’s best interests without having to worry about the short-term fluctuations of the stock market.
When it comes to deploying capital, private companies have an advantage over public companies. They can choose to reinvest profits in the business rather than allocating them to dividends or share repurchases. They can also make longer-term investments, such as in R&D or new products, without worrying about the short-term impact on earnings.
The evidence is clear that private market investors enjoy persistently higher returns than public market investors. The degree of causality is still being debated. Still, intuitively it makes sense that a longer-term orientation and the ability to deploy capital without the shackles of quarterly earnings reporting would lead to superior returns.
Other factors, such as inefficiencies in the private market and the lack of liquidity, also play a role. Research suggests, for instance, that the liquidity discount premium can be as high as 65%, with more conservative estimates in the range of 20-30%.
The resulting outperformance of private markets has led institutional investors to allocate an ever-increasing amount of capital to private equity, venture capital, and other private market strategies.
For a long time, private market investing was reserved for institutional investors and wealthy individuals. But that is changing. Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds and enables access for individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.
In August 1998, Long-Term Capital Management (LTCM), a large hedge fund, collapsed. LTCM had taken on too much risk and eventually went bankrupt. The fall of LTCM led to a financial crisis and the loss of millions of dollars for investors.
Individual investors can also learn from the mistakes of LTCM. Below are five investment decisions that could haunt you for decades if you’re not careful.
In the 1970s, John Bogle, the founder of Vanguard, popularized the concept of index investing. Analysts argued that it was impossible to beat the market, so a better strategy was simply investing in the entire market.
This investing strategy has become known as “passive investing.” It’s a sensible strategy for many investors because it’s low cost and easy to implement.
That said, private markets have consistently outperformed public markets over the long term. In addition, public markets suffer steeper drawdowns and longer pullbacks during bear markets.
While the last 13 years have seen an unprecedented bull market in public equities, it’s important to remember that markets don’t always go up. Analysts reveal that public markets are in a “super bubble” that could pop anytime.
The Fed’s policy of unlimited quantitative easing has created asset price inflation, but as 40-year-highs in inflation loom, the Fed is now shifting gears and sharply raising rates.
A rule of thumb states that out of 10 early-stage companies, only one or two will produce substantial returns. Given these odds, it doesn’t make sense to put all your eggs in one basket by investing everything you have in a few companies.
Given the tremendously large dispersion of returns in private markets, owning a large portfolio of positions is critical. A more diversified approach increases the chances that you’ll have those one or two companies that produce returns that justify the risk.
SPVs, or special purpose vehicles, became popular after the financial crisis. SPVs are legal entities used to hold assets or debt and isolate risk.
The problem with SPVs is that they’re often used to invest in risky assets, such as junk bonds, without any skin in the game. This can lead to big losses if the underlying asset defaults.
Moreover, SPVs are often opaque and lack transparency. It is difficult to understand the risks involved and make informed investment decisions.
Cryptocurrencies, such as Bitcoin, and collectibles, such as sports cards, have become popular investments in recent years. While these assets offer high returns, they’re also highly volatile and risky.
Investors should be aware that cryptocurrencies are not legal tender, are not backed by the government, and are often unregulated. In addition, there’s no guarantee that you’ll be able to sell your crypto assets for cash.
Collectibles, such as sports cards, are also risky investments. Speculation and emotion rather than fundamentals often drive the collectible market. This makes it difficult to predict when the market will turn.
Leverage can be a useful tool to magnify returns. However, it can also magnify losses. This is why it’s important to use leverage only after you’ve done your homework and understand the risks involved.
While institutional investors have teams of experts to manage leverage risks, individuals typically don’t. This makes it all the more important to understand the risks before you use leverage.
With Gridline, investors can avoid these common mistakes and access top quartile investments with low capital minimums, fee transparency, and greater liquidity.
Investing in early-stage companies demands a healthy risk appetite. Seven of ten investments will fail to return the money invested, two are expected to cover the losses, and the remaining firm should provide the anticipated 20-30% IRR that VC investors expect.
The potential upside is, of course, what fuels this market. As of writing, there are over 1,170 unicorns globally, each valued at over $1B, with a collective worth of $3.9 trillion. Success stories such as these make early-stage investing an attractive option for those looking to get in on the ground floor of potentially world-changing companies.
Even setting aside the outlier unicorns, the median private equity fund performance of 19% net IRR is more than triple the forecasted S&P 500 performance of 6% for the next decade. Top quartile PE performers do even better, with a median net IRR of +30%.
The potential rewards are significant. But so are the risks, as many in the bottom quartile of venture funds lose money. This does not mean, however, that VC as an asset class is inherently riskier than other types of investments. In fact, with the right approach, early-stage investing can be a relatively low-risk endeavor.
The actual risk of an asset class is the risk that remains after diversifying away all non-systematic risks. Investing in a wide range of companies and asset types makes achieving a high degree of diversification possible, mitigating the risk of any particular investment.
This is the approach taken by Gridline Alternative Portfolios. These portfolios are constructed using a Modern Portfolio Theory (MPT) framework, which considers each asset’s volatility and correlation to optimize for return. This results in a less volatile portfolio than the underlying assets would be on their own and has the potential for higher returns than a more traditional, 60/40 equity/bond portfolio.
However, the challenge with investing in many venture or PE funds is that they each come with high investment minimums and other access restrictions. These requirements are known to improve returns but make it challenging to build a truly diversified portfolio.
Gridline’s solution is to aggregate capital from multiple investors and use this larger pool of capital to invest in various alternative investment funds. This gives investors diversification benefits without the hassle or expense of going alone.
This approach can be likened to indexing in the public markets. Just as investors can buy an index fund that tracks the S&P 500, Gridline’s portfolios provide exposure to a broad range of private market opportunities.
This type of indexing has been shown to outperform individual deal-by-deal investing, as a Kauffman Fellows study found. Further supporting the importance of private market indexing, one analysis found that businesses stay private 50% longer, on average. Moreover, equity raised pre-IPO has quadrupled since the turn of the century.
This growth owes to rising liquidity in the private markets, increasingly onerous public market regulations, and a flight to quality by global investors seeking to increase potential returns while lowering volatility.
Given these trends, it is more important than ever for investors to consider indexing to capture the returns available in private markets efficiently. Sign up for Gridline to gain access to these opportunities.